Here we go again. A recent report predicted a coming shakeout in
electronics manufacturing services. And the media, doing what media do
best, picked up and ran with it, facts be damned.

The Reuters news service in August wrote Flextronics International
and Hon Hai (Foxconn) are "driving a wave of consolidation that
will boost their big customers while squeezing some of the smaller
ones." That assumption came on the heels of an iSuppli report
claiming falling revenues among Celestica, Sanmina-SCI and Elcoteq will
ultimately lead to contraction in the EMS world. Further, some 88% of
the world's top EMS/ODM executives believe that by 2013 one or more
of those companies will not exist, iSuppli said.

If I had a nickel for every time someone insisted to me their
competitor was going to disappear, well, I'd have a lot of nickels.

iSuppli based its findings in part on a predicted halving in
industry revenue growth. Per the research firm, global sales will hit
$432.3 billion by 2012, a CAGR of 7.2% from 2007, which is less than
half the 15.5% CAGR from the previous five years. Faced with slowing
revenue growth, the thinking goes, businesses will naturally merge or
gobble each other up in an attempt to drive the topline.

Except if they don't. A not-so-closer look reveals sanity has
returned to many of the larger firms. Burned by round after round of
acquisitions gone awry, most of the Top Tier has ceased buying revenue.
As Joe Bronson, Sanmina-SCI president and COO, said in these pages in
January (circuitsassembly.com/cms/content/view/5872/95), "Our focus
is on improving asset management. ... We have to pursue markets where we
can generate value and grow margins."

Likewise, in an interview in mid August, Celestica technology
department director Peter Tomaiuolo told me, "We're growing
incremental revenue profitably. We're not going to be the
biggest." In 2008 the company is tracking more than a full point
ahead of last year's margins.

The iSuppli report ignores this, noting mid-single-digit revenue
drops in 2007 at Sanmina-SCI, Celestica and Elcoteq. Yet the former two
firms are orienting more toward the higher margin military, aerospace
and medical markets. Sanmina-SCI this summer dumped its low-margin PC
business, a roughly $2 billion operation that barely broke even.
That's 19% of the $10.4 billion in sales the company reported in
2007.

[ILLUSTRATION OMITTED]

For its part, Elcoteq is undergoing a transition from being the
largest provider of handsets to Nokia to broadening (slightly) its
portfolio to telecom and IT. It's a highly competitive market, but
one the Finnish EMS company knows very, very well.

Could merger mania reduce the Top Tier to, say, Foxconn and
Flextronics? One longtime industry watcher told me major OEMs will never
let it happen, that they need many players around - even in the Top Tier
- to keep the biggest guys in line on pricing. While I don't
believe there's any type of thought-out conspiracy afoot (and I
don't think that's what the observer was suggesting),
it's true few OEMs single source a program, and more than a few
contracts are awarded for head-scratching reasons.

Traditionally, Foxconn has grown almost completely organically (or
with smoke and mirrors claims one prominent analyst who, for obvious
reasons, declines to be named), not through big acquisitions. And as we
reported last month, a new three million sq. ft. campus in Juarez,
Mexico, is in the offing. That doesn't sound like a company
planning a big acquisition.

At the Top Tier level, no one absorbs and integrates as well as
Flextronics. It's part of their business model, and I can't
imagine that will change soon. But Flextronics historically has been as
or more active in snapping up OEM assets. I can't imagine that will
change, either.

Our just published 2008 Directory of EMS Companies
(circuitsassembly.com/cms/dems) lists more than 1,000 companies and
1,400 sites, up a couple hundred from the 2007 edition. If a shakeout is
ahead, it's going to take awhile just to pick up all those pieces.

And yet ... "The competition is becoming more intense,"
iSuppli quotes Calvin Huang of the Daiwa Institute of Research. "We
will see another round of consolidation among these (contract)
providers."

Truth be told, I once made that misassumption. In 1993.

Not this time.

Mike Buetow, Editor-in-Chief

mbuetow@upmediagroup.com

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